Critical Salary Level Proposal

Companies urged to examine potential impact NOW to prepare

The Department of Labor (DOL) recently issued a proposed rule to increase the minimum salary requirements under the Fair Labor Standards Act (FLSA) for exempt employees. This would require that ALL exempt employees be paid no less than $50,440 annually starting in 2016—almost doubling the current minimum of $23,660. The proposed rule would also increase the minimum salary for Highly Compensated employees to 90% of the national earnings of full-time salaried workers ($122,148 annually in 2016).

“The President specifically mandated that the DOL raise the minimum salary level, but few anticipated that the number would be this high,” says Leslie Day, Precision Payroll’s Director of HR Consulting. She notes that this new exempt salary threshold was created by marking a ‘line in the sand’ at 40% of the average national earnings level for full-time exempt employees. The DOL has stated that this new salary level is an intentional attempt to force 40% of the exempt workforce toward a classification change to non-exempt status, where the employees must be paid for overtime.

“This will create an unprecedented level of change in the business community,” Day says, noting that the change will impact 4.6 million exempt employees (nearly one-half). “It is critical that business owners and top management try to get a grasp NOW on how it will conceivably affect their business.”

The rule is currently posted in the Federal Register, where comments can be logged for 60 days, ending in early September. Following a review period, experts foresee the rule being finalized, and that any adjustments to the proposed threshold would be small. The DOL has also asked for comments on additional possible changes to related areas of the FLSA, implying that more changes may be included in the final outcome.

For application to this new rule, an exempt position is one that meets all of the following criteria:

the company has designated the position as exempt

the work is executive, professional or administrative in nature

the position meets the duties test criteria established by the FLSA

the employee is paid on a salary basis: the same paycheck every week independent of how many hours are worked.

These employees are generally seen to have work responsibility related to the overall function of the organization.

Non-exempt salaried employees and hourly employees are paid based on the number of hours they work, and must be paid overtime (time-and-a-half) for hours worked over 40 hours per week under the Federal law, or any other overtime level as mandated by state or municipal law or union contract.

Legal experts say the finalization of the rule will likely come in November/December (assuming no other related rules are changed), with the effective date of the new rule being three months later in February to April of 2016.

Day warns that it is critical that employers are aware of how this rule would impact their workforce, what changes they might need to make, and the financial implications—especially for non-profit organizations and small- to medium-sized businesses in industries with small profit margins.

“Pay adjustments will most likely be required in an extremely short timeframe,” says Day. “This is not a time to wait until the last minute to understand and strategize.”

The government and some business experts have said that the new rule could lead to process efficiencies and other long-term benefits to companies. “When there are sudden pressures in as critical an area as employee pay, companies become creative,” says Day. “Companies will likely be forced to re-examine how tasks are done, who will perform these tasks, and how to streamline tasks to avoid overtime.”

Day recommends that all exempt positions in the organization be reviewed to make sure they meet all the criteria mentioned above for being exempt under the Fair Labor Standards Act. A more thorough explanation of these criteria can be found at http://www.dol.gov/whd/flsa/.

Precision Payroll offers an HR Help Desk service that can help employers wade through questions, issues and options as they transition to this new administrative rule. In addition, Precision HR can perform an audit of a company’s exempt positions to determine if they meet the criteria for being exempt. For more information, contact Leslie Day at lday@myprecisionhr.com or 630-785-2205, or Cori Koskela at ckoskela@myprecisionhr.com or 630-812-2392.

Precision Payroll also offers desktop-based timekeeping and tracking software that allows both exempt and non-exempt employees to track the hours they work. For more information, contact Gary Young, gyoung@precisionpayroll.com or 630-242-1522.

What to analyze as this rule is pending finalization:

Identify how many of your current salaried employees will be affected by this new rule – those paid below $50,440.

Assess how many hours beyond 40 (or which are eligible for overtime) your current exempt employees impacted under the proposed threshold (salary less than $50,440) are working. This will be an individual-by-individual assessment.

Decide if a salary increase for some or all of those not currently meeting the salary requirements is a plausible financial decision and the best solution for your business.

Decide if it would it be better that some or all of the positions be reclassified as non-exempt, with the employees then being entitled to overtime pay if they work overtime hours.

Assess if you can tighten up practices around working overtime or limit the number of overtime hours worked by any newly non-exempt employees, to reduce the higher payroll costs.

Consider if it is feasible to eliminate some first-line supervisory positions or mid-management jobs. This will result in tasks being shifted to others and may result in overburdening the next higher tier of exempt salaried employees since the work will still have to get done. What would be the cost of the problems that may result?

Look at specific job tasks and decide if they really need to be done. Can they be eliminated or streamlined through use of technology?

Check to see if there are any other consequences for changing status of positions from exempt to non-exempt, such as benefits eligibility.

Look at non-obvious issues, such as newly non-exempt employees checking and replying to emails or texts (work) needing to be curtailed, or overnight business travel eliminated.

Options employers will have if the rule is implemented:

Increase the exempt employee’s salary to that proposed in the new regulations so they can maintain the exempt status.

Keep the salary the same, reclassify the job as non-exempt, and pay any worked overtime hours based on the employee’s regular rate of pay. This is calculated by dividing the salary by 2,080 (hours per year for 40 hours per week; adjust for lesser hours). Overtime may be 1 ½ times or double time the base rate, dependent on legal requirements. Any bonus payments may need to be included.

Reduce the employee’s salary to a lower rate so total earnings do not change after overtime or bonus is paid. This would require an understanding of the number of overtime hours worked in the past or an estimate of overtime to be worked in the future.

Keep the salary as it is currently, keep the classification as salaried exempt, and eliminate the employee working any overtime hours. Even 15 minutes over in a week can result in the legal requirement to pay overtime, so you would have to closely monitor when these employees come and leave work each day and potentially force them out the door – no exceptions! No overtime = no violation of the law. The legal risk here is for non-paid overtime. A downside to this option is that, without any formal record of hours worked, you are at risk of being unable to prove the hours these employees actually work. This option is very risky.